Investors to see normalized reports

A standardized trustee report will soon be on the way to investors' mailrooms as The Bond Market Association released the final version of a template for monthly CDO trustee reports late last week.

Historically, non-standardized CDO trustee reporting has been a sore spot for investors, who complain of hard-to-read, indecipherable monthly reports. In fact, some trustees have used the problem to differentiate themselves by marketing the quality of their presentations. Investors, however, would likely welcome standardized, comparable deal reports.

That said, incorporating the new template into new deals actually rests on the shoulders of CDO dealers, not trustees. While utilizing the new form is completely voluntary, TBMA believes it will be widely adopted.

"The dealers are the ones who came up with this idea, and they have supported it all along," said Nadine Cancell, vice president and assistant general counsel at TBMA. Given that CDO dealers are involved in nearly every step of a CDO transaction - from picking collateral to choosing structure - they are also the ones who incorporate details like formats of trustee reports, when formalizing CDO deal documents, Cancell noted. Therefore, it's expected the new Bond Market Association template will see widespread use. "It's a useful tool for improving transparency," Cancell added.

"In our work monitoring RMBS and CDO transactions, we've heard investors and dealers express frustration at the lack of a clear standard," said Ellis. "This measure is a good start at introducing transparency."

Under construction since last year, with much input from the trustee community, a draft version of the report was made available in January. A comment period followed, and adoption was formalized last week by TBMA.

Perhaps most importantly, the BMA set a minimum level of content each report should include: 15 components that are considered the minimum level of content. The requirement includes chronological records of collateral sold, purchased, reduced or exchanged in both the current period and since the beginning of the deal. Other components are up-to-date coverage and collateral quality test results, principal asset balances, asset positions and collateral rating stats. A list of securities that defaulted while in the portfolio and those on upgrade/downgrade watch are also required, among other items.

Reaction from investors was subdued, but reassuring. One investor focused on ABS CDOs called the template "marginally helpful."

The new trustee template applies only to new U.S.-based transactions. The Bond Market Association's new European CDO committee will likely take trustee reports under consideration in the future, using the U.S.-based report as a guideline.

"The important thing is not so much what information is included but what an investor is supposed to do with the information," said a CDO investor. Overall, making information easier to read was seen as a step in the right direction.

Proponents hope the momentum for improvement will trickle into other markets.

"We would also like to see more standardization for RMBS remittances," added Murrayhill's Ellis.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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